Below is the text of Mr Major’s written Parliamentary Answer on the Exchange Rate Mechanism on 12th June 1990.
Mr. Austin Mitchell To ask the Chancellor of the Exchequer if he has made any assessment of the pound sterling’s subsequent movement in the bands had the pound sterling entered the exchange rate mechanism at the exchange rate prevailing on 1 January 1988, 1 January 1989 and 1 January 1990.
Mr. Major No.
Below is the text of Mr Major’s response on the European Monetary System made on 7th June 1990 in the House of Commons.
Dr. Moonie To ask the Chancellor of the Exchequer if he will make a statement on progress on the Madrid conditions for joining the exchange rate mechanism.
Mr. Wallace To ask the Chancellor of the Exchequer which of the Madrid conditions concerning the United Kingdom entry into the exchange rate mechanism of the European monetary system have yet to be fulfilled.
Mr. Bell To ask the Chancellor of the Exchequer when he expects that the conditions for the pound sterling’s participation in the exchange rate mechanism of the European monetary system will be fulfilled.
Mr. Major A good deal of progress has been made in a number of conditions for membership of the exchange rate mechanism, but they have not yet all been met.
Dr. Moonie Will the Chancellor tell us which condition is likely to be satisfied first: a satisfactory reduction in our underlying rate of inflation or the achievement of a level playing field through the abandonment of subsidies by our European competitors?
Mr. Major Significant progress has been made in recent months on a number of the external elements that we require before joining the exchange rate mechanism. We have made our position on domestic inflation perfectly clear and I stand by that.
Mr. Wallace At a recent press conference the Chancellor seemed to suggest that our underlying rate of inflation was much closer to Community averages than a proper statistical approach would reveal. Was he using that figure to try to persuade the Prime Minister that we really should be joining the exchange rate mechanism, and on those grounds should Opposition Members keep quiet about the statistical flaws in his figures?
Mr. Major It is always a distinct help to the Government if Opposition Members keep quiet, whichever part of the Opposition they may represent. In the remarks to which the hon. Gentleman referred, I was drawing attention to the fact that the British rate of inflation appears misleadingly unreasonable compared with those of our European partners simply because we contain within our inflation rate that which other countries do not, and it was in response to a question about that matter that I made the remarks to which the hon. Gentleman refers.
Mr. Bell When we enter the exchange rate mechanism, as the Chancellor of the Exchequer proposes to do in the summer, will he go in on the tight band of 2½ per cent. or on the broader band of 6 per cent? Will he share his views on that with the House?
Mr. Major I can neither confirm the date that the hon. Gentleman surreptitiously slipped into his question as an assumption, nor enlighten him on his substantive point.
Mr. Ian Stewart Will my right hon. Friend assure us that, regardless of the specific matters spelt out in the Madrid conditions, he will not contemplate the entry of sterling into the exchange rate mechanism until he regards it as fully compatible with the needs of domestic monetary policy and, in particular, that he will not do so at any time when it might mean that interest rates would have to be lowered more or more quickly than is necessary for the proper control of monetary conditions and the reduction of inflation?
Mr. Major I am acutely conscious of the point to which my right hon. Friend rightly draws attention. The aim of joining the exchange rate mechanism is to support the policy to reduce inflation, not to damage it, and from that, my right hon. Friend will be aware of our policy.
Mr. Budgen Will my right hon. Friend confirm that entry into the exchange rate mechanism is stage one of the Delors proposals? The Delors proposals are supported by all the Commission’s bureaucrats and by all the nation states of Europe, with the exception of ourselves. Paragraph 39 asserts that entry into the first stage shall be taken as acceptance of all subsequent stages.
Mr. Major My hon. Friend has made assertions about what the purpose of stage one might be and about the extent to which that falls within the Delors plan. The fact that the proposal is supported by what he calls the bureaucrats in Brussels does not in itself make it wrong. We have a series of sound economic reasons for joining the exchange rate mechanism. The Government set out the policy that they would join the exchange rate mechanism when certain conditions were met. That remains the policy and it will be in the interests of this country.
Mr. Tim Smith Now that United Kingdom membership of the exchange rate mechanism has become the fig leaf behind which the Labour party has chosen to hide the private and unpleasant parts of its economic policy, would not we be better advised to join sooner rather than later so that those inadequacies can be exposed to the public for all to see?
Mr. Major If, as my hon. Friend suggests, the exchange rate mechanism will hide the shortcomings of Labour policies, it will need to be a good deal larger than a fig leaf. It is perfectly clear that the conditions that the Labour party has set out under which it would join the exchange rate mechanism make that pledge – –
Mr. Skinner Not all of us in the Labour party.
Mr. Major The hon. Member for Bolsover (Mr. Skinner) is correct. The conditions set out by the Labour Front Bench, without the support of the Labour Back Benches, for joining the exchange rate mechanism are essentially bogus, for the conditions mean that the Labour Front Bench could not enter.
Mr. John Smith In the context of possible entry into the exchange rate mechanism, will the Chancellor tell us whether the sufficiency of any reduction in inflation will be assessed according to the retail prices index or according to the so-called “underlying” rate of inflation? May I have a direct answer, please?
Mr. Major The direct answer, as I have often said, is that the rate of inflation will be assessed on the proximate rate of inflation, which means – –
Mr. John Smith The retail prices index or the underlying rate?
Mr. Major I am coming precisely to the point. The rate of inflation will be assessed not on the RPI, but o n a comparative basis to the measure in which European nations themselves assess inflation. I have repeatedly made that point clear for a long time.
Mr. Nelson Does my right hon. Friend recall that when there were recent rumours that this country was about to become a full member of the exchange rate mechanism, the immediate effect was that the stock market rose, the exchange value of sterling became firmer and money market interest rates fell? In view of that positive response, which should have warmed my right hon. Friend’s heart towards the idea of joining the exchange rate mechanism immediately, will he bear it in mind that if he felt it necessary to take an executive decision, even while the Prime Minister is abroad, to embark on that, he would earn the recognition of a grateful nation?
Mr. Major I have had some attractive offers in my time. I am not entirely sure to what extent my hon. Friend’s offer ranks among them.
I have made it entirely clear to the House now and on previous occasions that I have reached the judgment that, when the conditions that we have set out are met, it will be right for us to join the exchange rate mechanism. We must be aware of the point to which my right hon. Friend the Member for Hertfordshire, North (Mr. Stewart), drew attention some time ago, that the balance of advantage in due course is clearly to enter the exchange rate mechanism, and in due course that is what we shall do.
Below is the text of the press release, 377/90, issued by Conservative Central Office on Tuesday 22 May 1990. It was titled, “What are Labour’s Plans for the Economy?”.
CHANCELLOR OF THE EXCHEQUER:
I’m looking forward with keen anticipation to the launch of the Labour Party’s policy document.
I’d like to pose some questions which they ought to answer in it, but almost certainly won’t.
Are we going to hear at last Labour’s plans for the economy? Will they explain how their policies would control inflation? Will they tell us the cost of their spending plans? Will they reveal the levels of taxation necessary to finance them? These are vital questions but to none have we so far had an adequate answer.
They say they would control inflation by introducing credit controls and joining the ERM. What sort of credit would be restricted? What sort of controls? How could credit controls work in the context of the Single European Market when intermediaries like shops can easily arrange credit through a European bank? Would they exclude mortgage lending, or would they create mortgage queues? And if they exclude mortgage lending how would their controls be effective, when 85 per cent of credit is for house purchase?
Labour say they would join the ERM. But that doesn’t remove the need for responsible economic policies. The ERM is a commitment to a stable exchange rate. So what do Labour mean by a “competitive” exchange rate? Is this pre-emptive devaluation? And, if so, how does it square with membership of the ERM? The truth is that Labour use the ERM as a fig leaf to cover their lack of a credible inflation policy.
Neil Kinnock accuses me of “clobbering the economy with 15 per cent interest rates”. And Labour say that they would use every economic weapon against inflation except interest rates. That is, they would use every weapon except the one that works. Every other country uses interest rates to control inflation, even the Labour Government in Australia. Only Labour plan to reduce inflation by lowering interest rates and stoking up demand.
The truth is that Labour have no credible strategy for controlling inflation. None whatsoever. And though they pretend they have only two spending commitments, every Shadow spokesman gives the lie to this statement. Last Friday, in Wales, Neil Kinnock himself either explicitly or implicitly called for more spending on health, social security, education, transport, roads and training. Just as John Smith calls for additional spending on training, regional development and support for industry every time he speaks. Their spending plans are limitless.
They fool no-one with their pretence that they are committed only to “an increase for pensioners and an increase in child benefit”. The fact is that Labour have a massive spending programme which can be paid only by increasing taxes or higher borrowing or a combination of both. As John Prescott has said, “it is not credible for Labour to suggest that our policies can be financed on a programme of low taxation”. For once he has hit the nail on the head.
Labour try to hide the effect of their plans on tax levels. They will abolish the upper earnings limit on National Insurance contributions, adding 9 per cent to the tax bills of almost three-and-a-half million people. People earning just over £18,000 before tax don’t regard themselves as rich, but they will be hit. They admit they will phase out the married couple’s income tax allowance, affecting 11 million taxpayers at every level of income. They admit they will re-introduce a surcharge on what they call investment income and ordinary people call savings. How does all this square with Neil Kinnock’s statement that Labour tax plans won’t hit the huge majority of basic rate taxpayers? The truth is it doesn’t – and it can’t. Millions of people will pay more tax to finance Labour’s plans and nothing can hide that fact.
No-one should believe the Labour Party have changed. They haven’t. They have no policy on inflation, they have no will to control expenditure, they have no idea how to run the economy. All they have to offer is debt, devaluation and decline.
The text of Mr Major’s speech to the CBI Annual Dinner, held on 17th May 1990.
CHANCELLOR OF THE EXCHEQUER:
I am very pleased indeed to have this opportunity to address your Annual Dinner, in this your silver jubilee year.
Over the years the CBI has become a pre-eminent representative for industry and business. Not only pre-eminent but vocal. No one could accuse you of being shy in expressing your views either publicly or in personal discussion; and the Government invariably considers what you say with great care – even though we cannot always adopt the policy prescription you set out. It has long been a forthright and constructive relationship; and I hope and expect it will continue to be so.
It is particularly important it remains so at present. For the economy is now entering a crucial period, which will test all that has been achieved in the last decade and which will set the base for our prosperity in the ‘90s. I believe that the British economy will pass that test – indeed do better than pass – but it may not be easy, for Government, or for business.
Our objective in managing the economy and industry is simply stated: it is to outperform our competitors. We need to show the successes achieved in the ‘80s – in productivity, in export markets, and in increased investment in new equipment, innovation and training – these successes were not just a flash in the pan; rather that they were an example of just how much attitudes and performance have changed in Britain.
The truth is that while 1990 is proving, as we expected, to be a difficult year, the 1990s will offer British businesses unparalleled opportunities. There is no need for despondency or hand-wringing. There is a need for businessmen and women everywhere to look to the future and plan for it. For the decisions which will spell success or failure for British firms in the years to come are already upon us.
At the moment, we are confronted with an unwelcome resurgence in inflation and a difficult short-term outlook. That has led some commentators to write off the last few years as no more than a brief interlude of success, and to say that now we might be sliding back to where we started at the beginning of the ‘80s. I understand this fear. But I disagree with it. I believe that this thought is wholly wrong, and potentially very damaging. I was pleased to see John Banham making these points with his usual force a few days ago.
Of course there have been setbacks. And I do not belittle the problems we face in the short-term. But however intractable they may seem to some, they are as nothing compared with the deep-seated weaknesses of the British economy at the beginning of the ‘80s. At that time our economic base was weak and uncompetitive, unhealthily reliant on declining industries, and contained some real pockets of economic deprivation.
That was so because for too long, Governments had disguised the symptoms of decline, and neglected the disease itself. As a result, the real cure, when it came, was all the more painful. But it was the essential precondition for a sustained revival in our economic fortunes. With great effort the trend of decades was reversed, and we began to make up ground on our competitors, and even to out-pace them in many respects.
And as many here tonight will testify, underpinning that recovery at national level were countless individual success stories: the thousands of people who began the decade working for someone else, and ended it as owners of businesses, creating still more jobs for others; the millions of individuals and families who in the ‘80s took the first step towards home-ownership, share-ownership or capital ownership. Remember too the re-birth of many of our regions, towns and cities – Glasgow’s nomination as this year’s European City of Culture being a striking example of this. The pessimists who look at where we are and worry should look also at where we have come from and how much has been achieved.
All in all, it has been an astonishing economic transformation, and one whose benefits will continue to work through the economy for years to come. And it has a lesson for us. What was achieved in the ‘80s can be built on in the ‘90s.
For the moment, the immediate priority of economic policy must be to bring down inflation. I am acutely aware that the measures we have to take hurt many of the people who regard themselves as the Government’s natural supporters – in particular, small businesses, and home-owners on modest incomes. I know there are some who are puzzled that we should keep in place policies that bear heavily on these groups. I understand that. But it is not hard to explain, not when one recalls the damage done by the high inflation of the ‘70s throughout society, to business, to investment, to industrial relations, to savers and those on fixed incomes. Anyone who recalls those days will know one thing very clearly: a period of high interest rates is infinitely preferable to the alternative of high inflation for good.
And that is the problem: the only alternative to high interest rates is inflation. I know there are always plenty of people peddling apparently easy options, but that magic potion – a pain-free cure for inflation – simply does not exist. Nor will membership of the exchange rate mechanism of the EMS remove the need for a tight monetary policy. I am sure we will benefit from joining the ERM and join it we most certainly will when our conditions are met. But it is an added discipline, which will reinforce domestic monetary restraint, not replace it.
There can be no doubt that interest rates have to be used to bear down on inflationary pressures. And there can be no doubt that they are working. The effects are clearly there for all to see – in the housing market, and in the high street.
But I am afraid their job is not yet done. Yes, we are seeing an effect, demand is cooling, but as I have said before, it needs to stay cool for a time while we work off the inflationary hangover. In particular, it will be a few months yet before we see an improvement in the RPI, and in the meantime it has reached an extremely unpalatable level. Of course the RPI overstates the real problem: the idiosyncrasies of the headline rate are well enough understood, and I need not rehearse them again here. But the fact remains that inflation, however you measure it, is unacceptably high, and we must force it down closer to the average of our competitors, and when we have done that we must try to get it down even further still.
We must do so because the reduction of inflation is not some abstract totem. It is the absolute precondition of all our hopes for the coming years. Low inflation will deliver them. High inflation will destroy them. From this it will, I hope, be clear that I have no intention whatsoever of relaxing monetary policy prematurely, and if necessary, I shall tighten it. And I should add that when I am able to reduce interest rates, I will do so cautiously and prudently. My aim is a resumption of steady and sustainable growth combined with low inflation.
Because interest rates are so painful we need the best possible information about how they are working. That means we need to monitor what is happening in the economy with great care. And yet in recent years a problem has arisen: in a buoyant, unregulated economy the behaviour of firms and consumers has often been in sharp contrast to many of the established economic wisdoms.
Most notably, we have found that people are prepared to live with far higher levels of borrowing and far lower proportionate saving than in the past. One reason for this is that credit has become far more widely accessible than in the days of the mortgage queue. But it is also the case that years of sustained growth in incomes and wealth here made people and firms more confident that they can service their borrowing in future.
These factors have proved important upward pressures on demand and to an extent they were predicted. But what we failed to predict was how far, if at all, they would be offset by external shocks such as the stock market crash, and how much and how fast they would respond to the progressive tightening of monetary policy over the last two years.
Such unpredictability is, I suspect, inevitable in a free and open economy, and I make no complaint about it. The freedom is worth the uncertainty. However, in addition to our inability to predict future behaviour accurately, it has become increasingly difficult to assess the present state of the economy with certainty – because of the growing gaps and inconsistencies in our official economic statistics.
The development of the latest outbreak of inflation highlights this very clearly. On the basis of the information available, in common with other countries, policy was directed at avoiding a crisis in confidence and a recession in the wake of the stock market crash. Having avoided that recession, as we now know, policy should have been tighter to bear down on strengthening inflationary pressures. With hindsight, we see that policy mistakes were made – but only with hindsight. At the time, we were not exactly overwhelmed by calls for higher interest rates, and the statistics we had to hand did not reflect the buoyancy of the economy. Again, even when tighter policy was put in place, we still underestimated the strength of demand we were trying to counter.
Since coming back to the Treasury I have given considerable thought to how to cure these statistical shortcomings. It is important we do because we need to ensure that we have the best information we can get, and as soon as we can get it, about the level and nature of activity in the economy, since it will inevitably carry on changing with ever growing speed.
The statistics we have at present do not provide that. Too often the first estimates of key indicators have been radically different from the final revised figures. And many of the accounts do not add up. There is for example a huge balancing item (a technical term for errors and omissions) in the balance of payments statistics for 1989 of over 15 billion pounds. And our information on service industries is very patchy – even though they now account for over half our national output.
In Parliament the Treasury and Civil Service Committee has emphasised the costs to economic policy of unreliable statistics. I know too that representatives of business have been pressing for similar improvements.
I have therefore announced today a package of improvements to statistics that should considerably improve our ability to monitor and forecast developments in the economy.
There are a number of elements to the package. It will involve enhancing existing surveys to collect more information on service industries, investment and profits and it will involve a thorough on-going review of the balance of payments statistics.
I expect the first of these improvements to be introduced by the Autumn and Winter. Taken together with the improvements already in hand, the results of this package should be a substantial improvement in the quality of our key economic indicators. I believe that is essential.
There will obviously be compliance costs, but we shall ensure that these proposals do not lead to unnecessary or excessive burdens on business. They will be kept to the absolute minimum necessary.
I have no doubt that the modest price of the new information will be well worth paying, not least because there will be tangible benefits for business as well as government. Better statistics mean better understanding on the part of government and business. And this in turn should lead to better decisions. That must be good for us all.
But more crucial than the decisions Government takes are the collective decisions of all of you in business, commerce and industry. On this front, I have two particular points I want to make.
The first concerns the familiar problem of high wage settlements. In particular cases no doubt high settlements are justified. But often they are not. And at present it is clear that pay increases overall are running ahead much too fast. Too many negotiators simply assume that they have to match or more than match the RPI regardless of their business circumstances. This morning’s figures for unemployment show graphically what happens if you take that approach. Higher pay and higher costs squeeze profits, investment and output and lead inevitably to higher unemployment. Sometimes restraint is necessary – and that applies as much to management’s salaries as to those of their workforce.
Some companies may imagine that if they price their goods out of markets the Government will accommodate this with a lower exchange rate. John Banham and Trevor Holdsworth have repeatedly pointed out the folly of such thinking – and they are right. It would be a great mistake to think the exchange rate can only move in one direction.
My second point concerns investment. There is no more welcome sign of the improved health of British industry than the record rise in investment over the last three years. I welcome this unreservedly – even though it is costing the Exchequer a massive nine billion pounds a year through capital allowances. I recognise that the slowdown in demand and output makes it harder for companies to invest for the future. But wherever they can invest I hope they will. And I believe they would be wise to do so. For investment needs and opportunities do not simply disappear because the short-term position is tight.
Indeed, in many respects the medium-term investment prospects in the world economy are very good indeed – especially in Europe. We are now only two years away from completion of the European Single Market – a huge market with a population approaching that of the US and Japan combined. The dramatic developments in Eastern Europe are creating fresh opportunities for business ventures of all kinds and will continue to do so. To give one example, hitherto East Germany has traded mainly within the Eastern bloc and UK exporters have sold very little there – only one hundred million pounds in 1989. As it becomes integrated in the Western economy we should aim and expect to account for as high a proportion of East Germany’s imports as we currently do of West Germany’s. In the long term that should bring as much as a tenfold increase in our exports, to one billion pounds – a substantial rise by any yardstick. And of course that is only one of the economies being opened up in Eastern Europe.
I have no doubt British exporters can take these opportunities. In the last year exports have increased by 11%, which is the clearest possible illustration that many British companies are ready to profit from these developments. But many are not. I am concerned when I hear of British companies that have not yet developed strategies for getting the most out of the Single Market. Enormous opportunities exist, but only for those ready to compete for them. And that means preparing now. Not tomorrow. That will be too late. Others will be there before you.
No-one should under-estimate the challenges before us, or the rewards available if we meet them. The 25 years since the CBI was formed have brought their share of problems, but looking across the span of years we can see also the enormous improvements they have brought to the general living standards and quality of life in this country.
None of that would have been possible without the growth of British industry and commerce. It is incomparably better managed, better equipped, more profitable, and more productive than it used to be. The climate in which it operates is altogether better. Now is the time for you to build on these strengths; and to carry them forward into the 1990s. I am sure you will do so.
Below is the text of Mr Major’s response on the ERM (Exchange Rate Mechanism) made on 26th April 1990 in the House of Commons.
Mr. Frank Field To ask the Chancellor of the Exchequer when he expects the Madrid conditions for exchange rate mechanism participation to be satisfied.
Mr. Major In due course.
Mr. Field Do the Government believe that all the conditions for entry, including those related to inflation, will be met by next year?
Mr. Major We must wait and see, but when the conditions are met we shall join the exchange rate mechanism.
Mr. Latham What specific features of the Bretton Woods agreement were so successful that we should want to recreate them now?
Mr. Major I think that we now find ourselves in a different set of circumstances, in which a greater degree of exchange rate stability would be extremely useful for everyone.
Below is the text of Mr Major’s written Parliamentary Answer on the Exchange Rate Mechanism on 15th March 1990.
Mr. John P. Smith To ask the Chancellor of the Exchequer what representations he has received from business and industry about British membership of the European exchange rate mechanism.
Mr. Randall To ask the Chancellor of the Exchequer what representations he has received from business and industry about British membership of the European exchange rate mechanism.
Mr. Major I have received a number of representations.
Below is the text of Mr Major’s Commons Response to Exchange Rate Mechanism Questions on 30th November 1989.
CHANCELLOR OF THE EXCHEQUER:
Mr. Geraint Howells To ask the Chancellor of the Exchequer what progress has been made as regards the conditions that must be met before the United Kingdom enters the exchange rate mechanism of the European monetary system; and if he will make a statement.
Mr. Major I refer the hon. Gentleman to my speech to the House on 2 November.
Mr. Howells Does the Chancellor agree that British farmers have no opportunity to compete on equal terms with their European counterparts because we are not full members of the European monetary system? What plans has he to help small farmers to overcome the problem of the high interest rates that now prevail?
Mr. Major Small farmers face the same difficulties with interest rates as other business men. I entirely understand the hon. Gentleman’s point, but I am bound to say that I think that the principal competitive problem that affects small farmers is caused by the unfair subsidies often received by their counterparts elsewhere in the Community.
Miss Emma Nicholson May I support the plea by the hon. Member for Ceredigion and Pembroke North (Mr. Howells) for help for farmers, and draw my right hon. Friend’s attention particularly to the extensification part of the common agricultural policy? The CAP is badly in need of modernisation, but surely extensification is the true new social way of helping farmers to retain their rural economy.
Mr. Major Whether or not that is correct – and I suspect that it is – it is probably only tangential to the exchange rate mechanism.
Mr. Chris Smith The Chancellor said on 2 November, and has said subsequently, that inflation must come down before Britain can join the exchange rate mechanism. He has also forecast that, at the end of next year, inflation will be running at 5¾ per cent. Will that figure be low enough, or is the inflation criterion simply another way of saying that he has no intention of taking Britain into the ERM in the foreseeable future?
Mr. Major As the hon. Gentleman’s hon. Friend the Member for Dunfermline, East (Mr. Brown) pointed out in a recent debate, I indicated my support for the exchange rate mechanism as long ago as 1981. The Government have set out four conditions that must be met before we can join the ERM; they were made entirely clear at Madrid, and they remain the same today.
Mr. Butterfill Does my right hon. Friend agree that we cannot make progress on an exchange rate mechanism while restrictions on capital movement between member countries remain? Those restrictions include not only exchange rate control, but restrictions on the activities of banks in various countries in raising foreign currency debt.
Mr. Major My hon. Friend is entirely right. He has touched on the other conditions that need to be met. We certainly need to see capital liberalisation, freedom of financial services and, of course, strengthened competition quality. Those matters are well understood by our European partners, who must deliver accordingly before we are in a position to join the ERM.
The text of Mr Major’s comments during the Economic Policy debate, made on 31st October 1989 in the House of Commons.
Mr. Speaker I must announce to the House that I have selected the amendment in the name of the Prime Minister. In view of the number of right hon. and hon. Members who wish to participate, I propose to put a limit on speeches of 10 minutes between 7 and 9 o’clock.
Mr. Dick Douglas (Dunfermline, West) On a point of order, Mr. Speaker. I hesitate to interrupt the flow of remarks, but when you impose that stricture, will you take cognisance of the fact that on recent occasions Front Bench spokesmen have consumed large proportions of the time allocated? Therefore, if Back Benchers are properly to be constrained by your ruling, Mr. Speaker, the same strictures should apply to Front Bench spokesmen.
Mr. Speaker As the House knows, I have no authority at the moment to limit the length of speeches made by Front Bench spokesmen. Nevertheless, I hope that what the hon. Gentleman has said will be borne in mind today.
Mr. John Smith (Monklands, East) I beg to move, That this House condemns the continuing confusion and disarray in the content and conduct of government economic policy; notes with deep concern the absence of full agreement on economic policy between the Prime Minister and the former Chancellor of the Exchequer; and deplores the continuing commitment to high interest rates which are causing such harm to industry and to the people of Britain. Since we last discussed economic policy in the House only a week ago, there have been some changes – some changes in the team. It was only a few weeks ago that the Chancellor of the Duchy of Lancaster – the chairman of the Conservative party – gave us the theme for the period to the next election. In his speech – the speech before Agincourt – he said: We must work together as a team. A team in the Cabinet: a team in Government. That was at the beginning of his speech. More attention appears to have been taken of an ominously prophetic quotation towards the end of his speech – in his peroration. He said: He which hath no stomach to this fight, Let him depart. We know that there has been a departure – the departure of the former Chancellor. He departed because he found it impossible to work in a team in which the captain does not support the leading player. In his resignation letter, the right hon. Member for Blaby (Mr. Lawson) said: The successful conduct of economic policy is possible only if there is, and is seen to be, full agreement between the Prime Minister and the Chancellor of the Exchequer.
We should do the right hon. Gentleman the credit of accepting completely what he said. Although his letter was short, it contained a terse but electric message: no Chancellor can carry out his arduous duties without the full support of the Prime Minister. In the case of the right hon. Gentleman, that support was withheld because of a preference for a part-time unelected adviser who spent only a minority of his time in this country. We are invited to believe – if we are to accept some of the curious answers given in the Prime Minister’s Walden interview on Sunday – that the right hon. Member for Blaby resigned because his head had apparently been turned by tittle-tattle got up by the press and that in that confused condition he had unaccountably and quite irrationally abandoned an unassailable position to leave the Government for no good reason.
The truth – as the former Chancellor told us – was that he was entitled to expect “full agreement” on economic policy and proper support. In this curious Government. he neither got it nor was seen to receive it, and not unnaturally he went – a victim of the confusion and disarray which is, in my submission, the inevitable consequence of the subversion of Cabinet government in which the Prime Minister has been engaged for the past 10 years.
There are two crucial areas of economic policy in which the acute divisions of policy are all too sadly evident and destructive of the public interest. Those are the approach to the possible accession of Britain to the exchange rate mechanism of the EMS and domestic economic policy, particularly in relation to the management of the exchange rate. For some time, the official stance has been that the Government would join the ERM when the time was right.
The Deputy Prime Minister restated that in an important speech on Saturday night. He said: Thus the position that we took in Madrid – one which the Prime Minister, Nigel Lawson and I all agreed – was the right one. We said ‘yes’ we want the existing EMS to be strengthened, ‘yes’ Britain should join and will join the exchange rate mechanism. We defined the conditions that would make the time right: Liberalisation of capital movements in the Community, headway in the battle against inflation – itself the crucial objective – and substantial progress on the single market. He added: We committed ourselves to stage one of the Delors report. As we all know, that envisages all member states participating in the exchange rate mechanism.
The right hon. and learned Gentleman went on: That was the position in June. As the Prime Minister, Nigel Lawson and I have repeatedly stressed in the House of Commons, it remains the position now. It is of the highest importance that Her Majesty’s Government is seen to remain committed to that position, clearly and in good faith. He added for emphasis: It is important – not just for the credibility of our common European commitment but for the economic health and political strength of Britain”. Note how important he envisages good faith – crucial to our economic health and our political strength.
I dare say that that speech in any normal situation would not have attracted as much notice as it did, as many observers would have believed it to be a perhaps enthusiastic, but certainly not inaccurate, statement of what Government policy was thought to be. The Deputy Prime Minister, however, must have felt some twinge that it might be more significant. He apparently consulted the new Foreign Secretary and the new Chancellor of the Exchequer, but he did not consult the Prime Minister; nor did he issue the speech through his Government office or even through the Conservative party news service. He issued it on plain, unheaded notepaper.
I hazard the guess that the right hon. and learned Gentleman did not consult the Prime Minister or use official or party channels because he did not wish there to be any impediment to the delivery of his message. His instincts were probably correct because, not long before he had spoken the words at 9pm on Saturday night, on Saturday afternoon the Prime Minister had recorded the interview on the Walden programme, which we saw on television on Sunday.
As we all know, that interview was an event of enormous political significance, a revelation of the Prime Minister’s style and approach to the problems of government, as an example of which it could not be bettered. It will be as indispensable to historians as it is to those of us who view these matters in a more contemporary frame. But it is also acutely relevant to the Prime Minister’s, and therefore the Government’s approach to accession to the exchange rate mechanism.
At first the Prime Minister appeared to take the normal line: We shall join the European Monetary System on the conditions we laid down in Madrid. There was nothing fudged about them” – curiously, no one alleged that there was anything fudged about them – they were quite clear. Let us recollect that the Deputy Prime Minister had told us – and he was Foreign Secretary at the time – that there were three conditions: liberalisation of capital movements, progress on reducing inflation and substantial progress – no more than that – on the single market.
That was not enough for the Prime Minister. On she went, throughout almost the entire second section of her interview, expanding conditions and extending time scales with gay abandon. Not only are exchange controls to be removed, but investment requirements on pension funds and insurance funds in all member states have to go. What is called – [Interruption]. Hold on. What is called liberal economics – with a small “I”; I suppose that we might call it Manchester school liberal economics – must be practised in all countries. A “higgledy-piggledy” system in which no one else plays by the rules must be transformed.
It can all be summed up by saying that, if all the other member states have adopted Thatcherite policies and the Prime Minister has personally inspected them all, looked to see that all the economic fingernails are clean, we might, just might, consider joining the exchange rate mechanism.
I observe in passing that the Prime Minister has noticed that Thatcherism has not crossed the English channel – how fortunate they are – and nor is it likely to do so. Why on earth would the other Community countries want to import the equivalent of a £20 billion balance of payments deficit and rates of inflation and interest rates much higher than obtain in their countries? But the clear message that the Prime Minister is giving is that, so long as she is Prime Minister – and that is until the next general election – Britain will not join the exchange rate mechanism.
Mr. Tony Marlow (Northampton, North) The right hon. and learned Gentleman deservedly has a high reputation. Would he care to enhance that reputation by putting on one side the humour and tittle-tattle and telling the House which of the Government’s conditions precedent to joining the ERM – conditions that have been set out at various times by the Government and on Sunday by the Prime Minister – the Labour party accepts and with which it disagrees?
Mr. Smith The hon. Gentleman knows well that we have repeatedly set out the conditions – [HON. MEMBERS: “Answer.”] He knows perfectly well that time and again we have proposed that Britain should join the ERM on certain prudent conditions which the Labour party – [HON. MEMBERS: “Answer.”] The difference between the two sides of the House is that we are clear about what those conditions are, whereas the Government side – [Interruption].
Several Hon. Members rose – [Interruption]
Mr. Speaker Order. The right hon. and learned Member for Monklands, East (Mr. Smith) is clearly not giving way.
Mr. Smith We do not know, on the Government side, what the conditions are, or what time scales are in operation.
Mr. Robin Maxwell-Hyslop (Tiverton) Answer the question.
Mr. Smith I can understand why the Conservative party wants to – [Interruption].
Mr. Speaker Order. There is great pressure to speak in the debate. Hon. Members should allow the right hon. and learned Gentleman to get on with his speech.
Mr. Neil Hamilton (Tatton) rose –
Mr. Cranley Onslow (Woking) rose –
Mr. Smith The fundamental problem – [HON. MEMBERS: “Answer.”]
Mr. Speaker Order. The House knows the rules.
Several Hon. Members rose –
Mr. Speaker Order. I say to the Government Benches that if the right hon. and learned Gentleman does not give way, hon. Members who are attempting to intervene must resume their seats.
Mr Maxwell-Hyslop Further to that point of order, Mr. Speaker.
Mr. Speaker Order. There was no point of order. I was reinforcing a ruling.
Mr. Maxwell-Hyslop Further to the point that was raised with you, Mr. Speaker. May I ask if it is not a fact –
Mr. Speaker Order. No point of order was raised with me. I rose to say, and I repeat, that if the right hon. and learned Member for Monklands, East does not give way, hon. Members who are standing must resume their seats.
Mr. Maxwell-Hyslop On a point of order, Mr. Speaker. The right hon. and learned Member for Monklands East (Mr. Smith) gave way. Questions were asked and certain answers were given – [Interruption]. You know as well as I do, Mr. Speaker, that if a Front Bench spokesman – [HON. MEMBERS: “Sit Down.”]
Mr. Speaker Order. The hon. Member for Tiverton (Mr. Maxwell-Hyslop) has been in the House for a long time and knows as well as I do that I am not responsible for questions that are asked, provided they are in order, and answers that are given, provided they also are in order.
Mr. Maxwell-Hyslop Further to my point of order, Mr. Speaker – [Interruption].
Mr. Speaker Order. [HON. MEMBERS: “Name him.”] I will hear what the hon. Gentleman has to say if it is a point order, but not if it is a point of argument.
Mr. Maxwell-Hyslop I assure you that I rise on a point of order, Mr. Speaker – [Interruption].
Mr. Speaker Order.
Mr. Maxwell-Hyslop I will continue when you can hear me, Mr. Speaker. We are all aware that if an hon. Member is speaking and gives way and is asked a question – [Interruption]. I will wait until you can hear me, Mr. Speaker.
Mr. Speaker Order. I get the drift of the point that the hon. Gentleman is making. It does not appear to be a matter of order for me. I suggest that we get on now.
Mr. Maxwell-Hyslop rose –
Mr. Speaker Order. I ask the hon. Gentleman to sit down.
Mr. Maxwell-Hyslop rose –
Mr. Speaker Order. For the final time, I ask the hon. Member for Tiverton (Mr. Maxwell-Hyslop) to resume his seat.
Mr. Smith It is a great pity that the House is not currently being televised, so that the whole nation could observe the organised wrecking tactics used by the Conservative party against the Opposition. [Interruption].
Sir William Clark (Croydon, South) rose –
Mr. Speaker Order. I repeat to the House – [Interruption]. Leave it to me, please. There is great pressure to speak today. I ask the House to listen without interruption. to what the right hon. Member for Monklands, East (Mr. Smith) is saying.
Mr. Smith The hon. Member for Northampton, North (Mr. Marlow) asked me about our conditions. Perhaps I may be allowed the opportunity which I have been trying to take for some time, of addressing that question, despite deliberate wrecking tactics from Conservative Members. The conditions applied by the Government will frustrate our efforts to join the exchange rate mechanism. The conditions that the Labour party attaches, apart from the important question of joining at the effective rate, are that there should be adequate swap arrangements between the central banks, that there must be a well-organised regional policy within the Community, and that the thrust of the economic policies within the Community should be for growth and not for deflation.
That approach has not only been approved by the other countries in Europe, but was substantially approved by the resolution of the European Parliament last week, for which the Conservative MEPs voted. Those MEPs, of course, have a problem in the European Parliament: no other MEPs will have them as part of their group. They feel a little detached from the Conservative party on this side of the Channel. No wonder! Perhaps “semi-detached” is an expression that may carry more menace for them.
In her interview, the Prime Minister’s clear message was that she had no intention of joining the exchange rate mechanism. She said of the timing that there had to be major changes by our errant partners – all the people who do not play by the rules and who are up to all kinds of dirty tricks. She said: Now all that should happen during … what is called the Delors first stage, the first stage coming towards monetary union. I hope it will but other countries have to catch up a long way before it happens. As she knows, there is no time limit to stage I of the Delors plan and she knows that the deadline for the single market is 1 January 1993. In so far as she claims that her conditions relate to completion of the single market, it would hardly be likely that she could make the judgment on their performance – a crucial part of her approach – before 1 January 1993. Let us remember that the last date for the next general election is June 1992.
I submit that the only reasonable conclusion to be drawn from that seminal interview is that there is no question of the Prime Minister agreeing to join the exchange rate mechanism before the next election. That position is hopelessly at odds with the view of the Deputy Prime Minister. Is it the Prime Minister’s policy that the Government do not anticipate joining the exchange rate mechanism? Is that the view of the Deputy Prime Minister, the Foreign Secretary or the new Chancellor of the Exchequer? The new Chancellor has an opportunity today to spell out his policy. If he does not, I fear that confusion will remain.
Let me remind the House of that crucial sentence in the speech of the Deputy Prime Minister: It is of the highest importance that Her Majesty’s Government is seen to remain committed to that position clearly and in good faith. The Prime Minister’s response may be clearer than the Deputy Prime Minister anticipated. However, does he believe that it can conceivably accord with the good faith that he believes to be of the highest importance and which is so important to our economy and our political strength? If it does not, can he accept what the former Chancellor could not – that a Government policy is undermined, and seen to be undermined, by the Prime Minister on national television?
When the Deputy Prime Minister refers to good faith, I believe that he has in mind good faith within the Government – rare though such a commodity must be – and good faith in relation to the other member states in the Community. It is worth reflecting on what those member states thought when they considered the patronising tone of the Prime Minister’s Walden interview. We can rest assured that there is one person who will not be worried by that. If the Prime Minister can feel sorry for all 48 other countries of the Commonwealth, why bother about a mere 11 in the European Community?
I referred earlier to divisions on domestic economic policy. To be fair, I believe that all members of the Government began with much the same position. In those early days, when monetarism was unchallenged within their ranks, the belief was firm that the exchange rate could be left to the market and that just controlling the money supply would keep inflation in check. Even the former Chancellor was in line then.
In a famous reply on 3 July 1980, when asked by my hon. Friend the Member for Liverpool, Riverside (Mr. Parry) what mechanism existed for medium or long-term alteration of the exchange rate, the former Chancellor replied simply, “Market forces.” That was the era of free floating when it was said that there was no stable or reliable relationship between interest rates and the exchange rate.” – [Official Report, 4 November 1980; Vol. 991, c. 537.] However, the former Chancellor learned by hard experience. He saw the irrational and wild oscillation in the exchange rates and began to move towards the position that he had adopted by the time of his resignation – that is, managing the exchange rate and participating in international agreements to stabilise exchange rates among the G7 nations through the Plaza and Louvre accords.
On the basis of his experience, the former Chancellor began increasingly to realise the potential value of participating in the exchange rate mechanism. Clearly he moved a long way, but the Prime Minister has not. The lady did not turn. She believed and she still believes, as she has told the House, “You cannot buck the markets.” That was her reason for demolishing the Chancellor’s policy of shadowing the deutschmark. It was also the reason why she summoned Sir Alan Walters back from the United States to be her adviser earlier this year. She apprehended that two issues were coming to the forefront on which, if she did not strengthen her position, she might lose out. Those were the arguments over the exchange rate mechanism and the desirability of seeking to manage the exchange rate.
The Prime Minister also knew, as she told us eight times on Sunday, that the former Chancellor was “unassailable”. I could hardly believe it when she said that again today during Prime Minister’s Question Time. However, it was precisely because the Prime Minister assessed the Chancellor as unassailable that she set out to undermine him.
Only the truly innocent believe that Sir Alan Walters was just another adviser – one of those people who advise while Ministers decide. He was more than that. He was a crucial ally of the Prime Minister. In the knowledge of his fierce opposition to joining the exchange rate mechanism, frequently and publicly expressed on both sides of the Atlantic, he was recalled to serve in No. 10. It did not take long for Sir Alan to become the alternative Chancellor, and we know the sad eventual outcome of all that. The new Chancellor will not have Sir Alan around.
Mr. David Tredinnick (Bosworth) Will the right hon. and learned Gentleman give way?
Mr. Smith No; I hope that the hon. Gentleman will forgive me.
If the new Chancellor seeks to develop a policy of which the Prime Minister does not approve, he will encounter the same problems as were encountered by the former Chancellor. The new Chancellor must make up his mind, and he should tell us today whether he follows the previous Chancellor’s policy or whether he takes sides with the Prime Minister and believes that the markets cannot be bucked.
While the new Chancellor carries out his duties, I urge him to be careful about the Prime Minister’s praises. If she calls him brilliant, he should be wary. If he hears the words, “brilliant, brilliant”, especially if the call is uttered shrilly, he should be worried. If he is ever described as unassailable, he should start to tidy his desk.
There are echoes of the Westland affair in all this. Once again, there is a serious dispute over a European policy question. The right hon. Member for Henley (Mr. Heseltine) wanted a European solution to the Westland affair. The Prime Minister did not. The right hon. Member for Henley was undermined by the leaking of a Law Officers’ letter – a process assisted by unelected officials in No. 10. Business as usual, one might say.
In the Westland affair, the Prime Minister lost two Ministers. In the present crisis, she has lost thus far only one, albeit the most senior Minister in her Government. The Deputy Prime Minister, who lost his old job in the reshuffle earlier this year, should take especial care. So should the new Chancellor.
The new Chancellor’s crucial training for his new post was not so much the two years that he spent as Chief Secretary to the Treasury; rather, it was his three months as Foreign Secretary. After he had negotiated an agreed communiqué with the representatives of the other 48 Commonwealth countries at Kuala Lumpur, his efforts were completely overturned by the Prime Minister’s lengthy denunciation of the views of those very countries.
As we approach the Council of Europe meeting to be held in Strasbourg in December, the new Chancellor should be especially vigilant; otherwise he might have been Kuala Lumpured in October only to be Strasbourged in December.
As the new Chancellor faces the task of steering British economic policy over the next year or so, I beg him to abandon the foolish notion that a balance of payments deficit now running at an annual rate approaching £20 billion does not matter provided that it can be financed. We know to our cost the price of such financing – interest rates of 15 per cent. which are doing such deadly damage to business and industry and causing such misery for home owners from one end of the country to the other.
Sooner or later – I earnestly hope that it will be sooner – the balance of payments deficit must begin to be reduced. In debate after debate, and only last Tuesday, Labour Members have urged the urgent need for an industrial strategy to begin the task of refashioning and rebuilding manufacturing industry. Manufacturing industry is the indispensable wealth creator and the crucially international tradeable part of our economy.
It is interesting that, whenever we urge the adoption of an industrial strategy for manufacturing industry, the Conservatives do not believe that that is a policy. That says far more about them than it does about us. Right across the political spectrum, people are deeply worried about the future of our industry. Those who work in it, manage it, and advise it are all deeply worried. The only people who do not seem to worry about the crisis in manufacturing industry – it must be a crisis, if we have a £20 billion balance of payments deficit – are the Conservatives, and the Ministers responsible for the conduct of our economic policy.
We will urge this alternative again and again until the message gets home – not only the Labour party, but the whole of Britain wants a strategy for manufacturing industry.
Mr. Tim Smith (Beaconsfield) Last week the right hon. and learned Gentleman told us that he supported an industrial strategy. Will he be a little more specific? We are all concerned about the prospects. Is the right hon. and learned Gentleman talking about tax incentives or greater public spending? What policies does he have in mind?
Mr. John Smith I do not know whether the hon. Gentleman was present during our debate last Tuesday – he probably was – but I am prepared to accept his assurance that he is concerned about manufacturing industry. The Opposition have many more Conservative Members to work on.
Let me spell out, as I did last Tuesday, the three crucial elements of that industrial strategy – first, the repairing of the ravages of the neglect of education and training by a massive education and training programme; secondly, a policy to introduce new technology by Government support for research and development; thirdly, a strong regional policy to tackle the continuing decline of the under-used regions of this country. Once again, one may be told –
Several Hon. Members rose –
Mr. Smith Conservative Members should allow me to speak. Given what happened earlier, I have been reasonably generous in giving way at all to some Conservative Members.
As the hon. Member for Beaconsfield (Mr. Smith) will come to realise, perhaps before his colleagues on the Government Front Bench do, that is the essential precondition of any successful economic policy for this country. The Opposition have also urged the abandonment of the one-club golfing of exclusive reliance on interest rates and recommended the limitation of bank lending as a superior alternative to the control of demand, as long as that is necessary.
In addition, the new Chancellor should take the opportunity today to rule out tax cuts in the next Budget. He should use the Autumn Statement, again as the Opposition recommended only last Tuesday, to initiate regionally targeted public investment to strengthen education and training, and research and development, and to stimulate regional economies.
That is not only an alternative policy – it is the alternative policy which Britain desperately needs. It is a policy which will secure our prosperity not just for the year or two to come but throughout the 1990s. Let us never forget that the crucial folly of the former Chancellor’s policy was to lecture the Federal Republic of West Germany that its economic miracle was over and that ours had just begun.
When we look at the massive trade deficit and how it has gone throughout the whole of this decade, despite North sea oil revenues, which the Conservative party had and which they frittered away, we see an adequate commentary on the effectiveness of the Government’s policy. Let it not be forgotten that other countries of the EC, which, in the Prime Minister’s warped view of our continent, are so badly trailing behind, have superior economies and are much better fashioned societies than ours.
The purposes of economic policy are to be centred on four objectives – steady and balanced economic growth, control of inflation, the attainment of full employment, and reasonable equilibrium in our balance of payments. The last objective – the balance of payments – has been downgraded as we have seen a decade go by in which our North sea oil wealth has been frittered away and our economy and society made the laboratory for Thatcherite experiments in free market economics, social unfairness and the retreat of Government from their proper responsibilities.
Because of the conduct and content of Government policies, I fear that our economy has been gravely weakened and the social cohesion of our society put at risk. This country desperately needs a change in the style of Government and in the economic policies that have been pursued – a change in both the conduct and content of Government. But we are told that it is business as usual. The country received that statement as a threat, not as a promise. In an interview in the Daily Express, the Prime Minister told us that her convictions had to be seen in every piece of policy. That must have sent a shudder through every independent-minded Minister – if there are any left in this Administration. The Prime Minister’s convictions “in every piece of policy” tells us more about how the Government are run in this country than almost anything else. If it is business as usual, we will continue with a debilitating balance of payments deficit, and the highest interest rates and the highest inflation rate of leading industrial countries. I fear that, both economically and socially, we will continue to lag behind the rest of Europe.
This confused and divided Government cannot provide the leadership which Britain needs for the 1990s. They cannot do so, because they cannot change while the Prime Minister remains at their head. As the Financial Times editorial observed on Saturday As she has become pre-eminent her Government has become much more vulnerable. What concerns the Opposition is not so much the vulnerability of Government as the vulnerability of our country. What Britain needs is not a new Chancellor but a new Government – a Labour Government.
The Chancellor of the Exchequer (Mr. John Major) I beg to move, to leave out from “House” to the end of the Question and to add instead thereof: ‘congratulates Her Majesty’s Government on the determination with which it has pursued policies to bear down on inflation and improve the supply side of the economy; welcomes the sustained growth of output, productivity, investment, employment and living standards which the United Kingdom has enjoyed as a result; and endorses the Government’s resolve to continue with the policies which are in the long-term interest of the British economy.’. At the outset I wish to say how much I regret the resignation of my right hon. Friend the Member for Blaby (Mr. Lawson). I had the pleasure of serving with him in the Treasury for three years – for one year as Treasury Whip, and for two years as Chief Secretary. I enjoyed that experience enormously. I supported his policies and those of the Government when I was Chief Secretary. I believed that they brought increased prosperity to the country then, and I have not changed my view since then. Whatever the controversies of the day may be or may bring, I believe that history will record that few Chancellors brought about so many fundamental improvements to the economy of this country. Only the grudging and mean-spirited will deny that. My right hon. Friend was a great reforming Chancellor and will be remembered as such.
The right hon. and learned Member for Monklands, East (Mr. Smith) made his usual forceful speech – both forceful and his usual speech. It was good music hall. He has become the Jasper Carrot of parliamentary debate. For all the humour, however, it was an empty speech. It was empty of policy, it made no serious attempt to diagnose the problem, and it provided no solutions whatsoever. On the one single issue on which he was questioned by my hon. Friend the Member for Northampton, North (Mr. Marlow) it was not until some minutes had passed and someone had whispered to him that he actually provided the answer.
There is no difficulty at all about a diagnosis of the economic problem that we face at present. As a result of over two years of exceptional growth on a scale which no one expected, least of all the Opposition, we have seen the re-emergence of inflationary pressures. They are evident both in rising domestic prices and in the growth of imports.
Let me be quite clear about the main priority before us. It is progressively to reduce inflation and bring the economy back to the path of steady growth. There is no doubt about that. I know that inflation is not high by the standards of the 1970s, and it is still as low today as in the best month we ever saw during the period of the last Labour Government. I know, too, that some people argue that a little inflation is no bad thing, that one can live with it, that it induces a feeling of well-being and does no harm. Emphatically I do not share that view.
I do not share that view because inflation has two particularly destructive effects. First, it damages the economy – it brings uncertainty, it discourages investment, it breeds suspicion and conflict in industrial relations, and it puts a premium on playing safe at all levels of management. It is no coincidence that the past eight years, which have seen the longest period of sustained growth – strong and steady growth – since the war, has also been the period in which inflation has been reduced.
Ms. Clare Short (Birmingham, Ladywood) Given that inflation is destructive in all the ways that the right hon. Gentleman has described, why have the Government allowed it to rise?
Mr. Major The hon. Lady would have done far better to address that problem to her right hon. and learned Friend the Member for Monklands, East. She should also be aware that, if we were to see the implementation of the policies that her right hon. and learned Friend has in mind, inflation would be back in the stratosphere. I shall turn to that particular question in a moment.
Mr. Tony Banks (Newham, North-West) rose –
Mr. Major But the social effect of inflation is even more pernicious, as we saw during the period of office of the last Labour Government. It bears most heavily on those least able to protect themselves. In the last five years of the 1970s, with high inflation and low interest rates, pensioners saw the value of their life’s savings halved and their retirement security diminished. Indeed, many pensioners today may be on social security benefits, not because they failed to save and prepare for a secure retirement – often they did so at some hardship and sacrifice – but because the Labour Government lost control of inflation and destroyed their security. That happened because the Labour Government had neither the courage nor the foresight – or both – to pursue the necessary but occasionally unpopular policies to curb inflation.
The Opposition have learnt nothing since then – as the hon. Member for Birmingham, Ladywood (Ms. Short) should know. Their present policy is clear. They would reduce interest rates prematurely and relax monetary policy. They would increase spending massively, and undermine fiscal policy.
Mr. Tony Banks rose –
Mr. Stuart Bell (Middlesbrough) rose –
Mr. Major rose –
HON. MEMBERS Give way.
Mr. Speaker Order.
Mr. Major Labour would devalue the currency as each and every previous Labour Government have done – [Interruption].
Mr. Speaker Order. I must say to the House again – as I had to say to Conservative Members earlier – that if the hon. Member who has the Floor does not give way, hon. Members must resume their seats. It only wastes time to shout, “Give way, give way.”
Mr. Major I understand that the Opposition do not like being reminded about how their policies destroyed people’s security, but they deserve to be reminded because they are peddling the same policies again. The policies that they operate would not stop inflation. They would unleash hyper-inflation, with all the economic and social consequences that we saw before.
There is no conviction whatsoever in the Opposition’s concern about inflation. Their conviction is against the very policies that would curb inflation and bring it down. That is their concern.
We need to be quite clear about the need to bring inflation down and I have no doubt whatsoever that we are right to use all the practical levers at our disposal to do so.
Mr. Bell I should like the Chancellor to concentrate for a moment on the Government’s present policies. The OECD review stated that the Government have been raising interest rates to bear down on inflation and to stabilise the exchange rate. Is that still the policy of Her Majesty’s Government?
Mr. Major If the hon. Gentleman will wait a moment I shall turn specifically to that point. Indeed, I have already begun to do so.
In my judgment, we are absolutely right to use all the practical levers at our disposal to bear down on inflation. One of these – an important one, of course – is fiscal policy. One of the great achievements of my right hon. Friend the Member for Blaby has been the transformation of the Government’s financial position.
Public expenditure – [Interruption]. Opposition Members racked up debts day after day when they were in Government – we have repaid the debt that they racked up. Public expenditure remains under firm control, and we are now repaying Government debt – the debt that the Labour Government built up – on a massive scale. By the end of this financial year we shall have repaid roughly one sixth of the public debt accumulated over two centuries, at an annual saving of £3 billion in debt interest costs.
No one should doubt that my right hon. Friend the Member for Blaby had a tight fiscal policy, and no one should doubt that I intend to keep it equally tight.
The key lever on inflation is monetary policy – the use of interest rates. I understand very clearly that high interest rates are often unwelcome and often painful, but they are effective and they are having their intended effect now. Spending is slowing down, with retail sales in particular falling over the past three months; so are house prices, which rose much too fast over the past two years; and so is monetary growth, which is now moving close to its target range.
I understand very well that present levels of interest rates make things very difficult for some home owners, particularly young people who have large mortgages in relation to their incomes, but there are others who should also concern us. We also have to be concerned about those young people who could not afford to buy in the first place, because of the pace of rising prices – [Interruption]. If only for their sakes, there had to be a correction to rising house prices to prevent them being priced right out of the market. That correction is now happening – [Interruption]. It is clear that Opposition Members hate the thought of home ownership and the independence that it brings. The harsh truth is that too many people have been borrowing too much and saving too little, and high interest rates provide a direct incentive to redress that balance.
Interest rates have other important effects, however – not least on the exchange rate. A falling exchange rate directly raises the prices of things that we buy from abroad and reduces the discipline on British industry. That can only feed inflation. A firm exchange rate helps underpin the policy to stop inflation, and for these reasons it should be clear that I favour a firm exchange rate.
Mr. Eric S. Heffer (Liverpool, Walton) The right hon. Gentleman talks about the housing problem. Is he aware that the Government have been responsible for cutting council housing? They have encouraged the idea that people should buy their own homes and now they have implemented a policy of high mortgage rates, which means that the very people whom they encouraged to buy are suffering under their policies. How can the right hon. Gentleman explain why the Government should be so cruel to the people whom they encouraged to buy homes and why they are also leaving people without any houses at all?
Mr. Major The hon. Gentleman should bear in mind that under this Government this country has seen its greatest ever growth in home ownership – [Interruption] – and that will continue.
Not surprisingly, exchange markets were unsettled last Thursday, but less so than many imagined and far less than the Leader of the Opposition predicted. On Friday he said, “today when the pound plummets” – [HON. MEMBERS: “Disgraceful!”] But it did not plummet. And I hope that in future the right hon. Gentleman will keep his market predictions to himself and not seek to talk sterling down. Markets can see for themselves that policy has not been changed and will not be changed.
Mr. John Smith If the right hon. Gentleman believes that markets sustain the Government’s policy, is he aware that a year ago today the pound was valued at DM 3.15, but today it is valued at DM 2.90? Is he also aware that interest rates were then 13 per cent., but today they are 15 per cent.? What kind of market verdict is that on the Government’s economic policy?
Mr. Major Two years ago, markets were at almost precisely the same level as they are today, a point that the right hon. and learned Gentleman has overlooked. Markets can see that policy has not been changed and will not be changed, and no change in policy means just this. It means that I will set interest rates as high as is needed for as long as is needed to bring down inflation, and in this I will continue to be guided by a range of monetary indicators, including the exchange rate.
I will deal comprehensively with the Government’s approach to economic and monetary union and the Delors report in the debate on Thursday, but I shall say something now about the exchange rate mechanism of the European monetary system.
Mr. Jack Straw (Blackburn) Has she seen this speech?
Mr. Major As a matter of fact, my right hon. Friend has not seen the speech.
HON. MEMBERS Oh.
Mr. Speaker Order.
Mr. Major I am sorry to disappoint the Opposition on that point.
The exchange rate mechanism, as its name implies, is no more than a contrivance, a means for promoting a greater stability of exchange rate between Community currencies and greater price stability. However, it is not a recipe for problem-free economic management, and it should not be seen as such. We should recognise that it does not change the economic fundamentals. It does not reduce the pain of bringing down inflation. It does not mean that a country does not need reserves and can forgo intervention in the exchange market – far from it. It does not, and cannot, absolve a country from an adequately tight monetary policy. It does not insulate a country from high interest rates. Anyone who believes that early British membership would bring interest rates in the United Kingdom tumbling down would be sadly disappointed. Indeed, the very essence of the exchange rate mechanism is a strong commitment to set interest rates at whatever level is needed to keep the exchange rate within its bands.
Although it is no panacea, experience in recent years suggests that the exchange rate mechanism has helped participants both to bring about greater stability in exchange rates and to reduce inflation. I am in no doubt that in the right circumstances it would help us, too. But the circumstances have to be right if it is to be in our interest to join. The exchange rate mechanism will face new tests as exchange controls are abolished throughout the Community, and as the single financial market develops. In these circumstances, it would be very risky both for the United Kingdom and the present participants to introduce sterling – a currency which is traded much more widely than any other in Europe with the single exception of the deutschmark – when there is such a large differential between our inflation and interest rates and those in Germany.
Following the Madrid summit, the Government reaffirmed their commitment to join the ERM and specified precisely the conditions under which we will do so. The question is not whether we should join, but when. I repeat the conditions now for the avoidance of doubt. We will join the exchange rate mechanism when the level of United Kingdom inflation is significantly lower, when there is capital liberalisation in the Community, and real progress has been made towards completion of the single market, freedom of financial services and strengthened competition policy. That was the position that was set out at the Madrid summit and it remains the position today. There should be no doubt: when these conditions are met we will join – clearly and in good faith. Were it not a question of good faith, my right hon. Friend the Prime Minister would not have set out the conditions so clearly some time ago.
Mr. A. J. Beith (Berwick-upon-Tweed) How long does the right hon. Gentleman think will be a reasonable period of time within which to assess whether these things have come to pass?
Mr. Major As the hon. Gentleman will have understood from what I have just said, that is not wholly within our hands, for much of the action needs to be taken by other people, rather than us, so how speedily that will be done is in other people’s hands as well as ours.
Without those conditions being met, entry into the exchange rate mechanism would be neither in our interest nor in that of Europe. With them, membership of the exchange rate mechanism will bring benefits to this country as it has, in my judgment, to its present members. That is a further reason why economic policy must be addressed to bringing inflation down – both for wider economic reasons and as the necessary preliminary for entry into the exchange rate mechanism. We have set out our conditions for entry clearly. We are not hiding behind “certain prudent conditions”, as the Opposition sought to do.
Bringing inflation down is an important task, but it will be neither easy nor speedy. Inevitably, anti-inflation policy is bound to slow the economy down for a time. Therefore, I do not expect to see domestic demand growing anything like as fast next year as it has in recent years. Nor would I expect anything more than a fairly modest rate of output growth. With spending slowing down, businesses will have to take a hard look at ways to keep down their costs, including wages. If they do not succeed in that, the harsh truth is that jobs may be lost, needlessly. I hope that management and unions will ensure that that does not happen, and that Opposition Members will reinforce that message.
In recent months, much has been made of the rapid growth of our trade deficit, not least by the right hon. and learned Member for Monklands, East. It has grown.
Mr. Robert Sheldon (Ashton-under-Lyne) Does what the right hon. Gentleman is saying confirm that he does not believe that the exchange rate mechanism is a half-baked scheme?
Mr. Major The right hon. Gentleman may reflect on what I have just said. I have said that when the conditions are right we shall enter into the scheme. That is self-evident.
In recent months, the right hon. and learned Member for Monklands, East has made much of the rapid growth of our trade deficit. It has grown, and by far more than is comfortable. It cannot continue at present levels and it will not, as we have always said. In due course, it will come down as demand growth slows.
But the Opposition paint far too black a picture of the trade deficit. What they have never been prepared to admit is that much of it reflects investment and not consumption. Over the past two years, investment has grown by 23 per cent. – the fastest two years of investment growth on record – and over the whole life of this Government investment has grown far faster than consumption. This investment does suck in imports – often capital equipment – and it may widen the trade gap in the short term. That effect is clearly unwelcome. What must be understood is that in the medium term, to the extent that these capital imports build up extra productive capacity, that will play a part in reducing future deficits. Much of today’s problem is a preliminary to better performance tomorrow, and exports have been performing better and now stand at an all-time record level.
I suppose that it was a little optimistic to expect the right hon. and learned Member for Monklands, East to acknowledge the facts on investment. Business investment is a higher proportion of gross domestic product than ever before, but as far as the Opposition are concerned, that does not count. Why not?
In their view, it does not count because investment is not investment unless it is paid for by the taxpayer, because training is not training unless it is publicly financed by the taxpayer, and because the supply side of the economy cannot possibly be right unless it is managed from the centre. It would be a tragedy for industry if that form of thinking ever returned to the government of this country.
Over the last decade, under our economic policies, the underlying strength of the economy has improved and British industry is in fundamentally good shape. Our approach is working. In the past two years profitability has been higher than at any time since the 1960s. There is a record rate of new business start-ups – more than 1,600 per week so far this year, by far a new record. Productivity in manufacturing has grown faster in the 1980s in the United Kingdom than in all the other major industrialised countries. And that is after two decades in which we were bottom of the league, much of the time governed by a Labour Government. Moreover, employment has risen faster over the past five years than at any time since the war and by more in this country than in any other European country.
Mr. Graham Allen (Nottingham, North) As the new Chancellor of the Exchequer has put forward such a convincing view of how rosy the economy is, will he tell the House why in such circumstances his predecessor resigned?
Mr. Major I should have thought that the hon. Gentleman could do a good deal better than that. I suspect that my right hon. Friend the Member for Blaby (Mr. Lawson) will be able to speak for himself on that matter.
None of those improvements is accidental. Each and every one of them is a direct result of the policies that we have pursued over recent years. It may be that we shall face a difficult year ahead, but if that is to be so, industry is far better motivated and equipped to handle it than at any time in the 1970s.
Only the Opposition refuse to recognise the changes that have occurred in the past 10 years. Their persistent denigration of the economy bears no relation to reality. Business men, both here and abroad, are well aware of the improvements that have taken place. They know that this country’s economy is strong. That is why they are investing in this country at record levels. Work forces know this too. That is why workers, more involved than ever before in the success of their companies, have increased their productivity faster than in any other major industrial nation – and we have more people in work than at any time before in our history.
I believe that people recognise that we must deal with the short-term difficulties before us, and they expect us to do so. They know that our economic prospects have been improved out of all recognition in the past decade, and they expect us to build on that. The fact that the right hon. and learned Member for Monklands, East does not recognise it is a sign of how out of touch he is now and will be shown to be at the next general election. I have no doubt that the policies that we have been following are the right ones and I propose to continue them. I see no need for radical changes in policy.
We must never go back to the policies which nearly destroyed our economy in the 1970s and led to the inflation rate of a banana republic under the Labour Government. The Labour party is well aware of that. That is why it has invented Mr. Mandelson and his public relations gloss and disinvented Socialism. Socialism is rarely mentioned from the Opposition Front Bench except to deny that it exists. The Labour party knows what poison it is for most of the people in this country. Occasionally, even – [Interruption].
Mr. David Shaw (Dover) Listen, Kinnock!
Mr. Major If the Leader of the Opposition is back with us, I shall continue.
Occasionally, even BBC interviewers ask what Labour would do. The Leader of the Opposition tells them with delicious frankness that he has not a clue. But the Labour party’s policies, however it tries to hide them, seep out one by one. The Labour party is in favour of credit controls – just as everyone else is abandoning them. It would renationalise wherever it could. It would increase taxes on companies and individuals. It would abolish the trade union legislation. The Leader of the Opposition would reinvent sector working parties. A Labour Government would spend more – [Interruption].
Mr. Speaker Order. I do not need to remind the House of the pressure that there is to participate in the debate. I ask the House to give the Chancellor of the Exchequer a fair hearing for the rest of his speech.
Mr. Major The right hon. and learned Member for Monklands, East said a few minutes ago that he wished television were here in the Chamber. I wish that the public could see the behaviour of Opposition Members. They cannot bear the fact that over the past few years the levels of prosperity in this country have risen by an unprecedented amount and the people are well aware that that is the case. They know very well that the policies of the Opposition would take us back precisely to where we were in the 1960s. A Labour Government would spend more, borrow more and, yet again, they would devalue, as each and every successive Labour Government have done. The policies that they espouse are the failed policies of the 1960s. The electorate rejected them before and it will do so again. I invite my right hon. and hon. Friends to reject the motion and to support the amendment.